Channon (t/a Channon & Co) v Ward

In assessing loss caused by a broker’s failure to arrange professional indemnity insurance, the court must determine what would probably have happened if valid cover had existed. The insured must first establish that the hypothetical policy would have covered the claim. The burden then ordinarily shifts to the broker to show that the insurer would have refused indemnity under an exclusion or other provision. The court assesses the conduct of the actual insured and insurer, not what a hypothetical reasonable person might have done. A claimant must show a substantial, rather than speculative, chance that the insurer would have provided indemnity or assistance. An insurer may investigate the true nature of the claim and is not bound by the claimant’s pleaded formulation.

The claimant, a chartered accountant, sued his former insurance broker for failing to maintain professional indemnity insurance. Seven investors had obtained judgment against him after he settled claims alleging negligent investment advice concerning a property development company of which he was a director. The claimant contended that, had insurance existed, the insurer would have indemnified him or funded his defence.

Liability against the defendant broker had already been established by default. The remaining issues were causation and quantum. The central question was whether there was a substantial and non-speculative chance that an insurer would have provided indemnity or assistance, and whether the claimant would have challenged any refusal.

1. Claim dismissed. The claimant failed to establish a substantial, rather than speculative, chance that the outcome would have been materially different if insurance had been in place.
2. The court assessed the hypothetical events as matters of fact and evaluative judgment. It applied the approach in Phillips & Co. (A firm) v Whatley [2007] PNLR 27, including the need to consider what the particular insurer and claimant would probably have done. The claimant’s evidence and the surrounding circumstances did not show that he would have challenged a refusal of indemnity.
3. The insurer would probably have refused indemnity, or further assistance, on the basis of the exclusions concerning guarantees or warranties relating to investment returns and losses arising from trading losses or liabilities of a business managed by the insured. The court regarded those provisions as clear and wide enough to encompass the investors’ claims.
4. The insurer would also probably have argued that the claims did not arise out of the conduct of the claimant’s accountancy business. Applying the approach in West Wake Price & Co v Ching [1956] 3 All ER 821 and Thornton Springer v NEM [2000] 2 All ER 489, it could examine the true nature of the claims rather than accept their pleaded description. The claims appeared substantially connected with commercial dealings undertaken by the claimant as a director of a separate property company.
5. On burden of proof, the claimant had to establish that a valid policy would have covered the risk. The defendant bore the burden of proving reliance on exclusions and the claimant’s likely response to them. In the circumstances, the court treated that burden as resting on the defendant throughout. That burden was successfully discharged.